On January 22 2014 Clearstream Banking, SA agreed to pay the Department of the Treasury's Office of Foreign Assets Control (OFAC) $152 million to settle claims that it violated US economic sanctions. Clearstream is a financial institution in Luxembourg and a subsidiary of the Deutsche Börse Group. It allegedly violated US sanctions laws by using an omnibus account at a US financial institution as a conduit to hold securities for the Central Bank of Iran (CBI), a target of US sanctions. The settlement follows on the heels of a number of OFAC settlements and enforcement actions against foreign financial institutions, and suggests that OFAC may begin imposing multimillion-dollar penalties against the securities industry similar to those imposed against financial institutions for so-called 'stripping'.
Going back to at least 2007, Clearstream held an omnibus account at a New York bank through which the CBI held a beneficial interest in securities worth over $2.8 billion. After Clearstream met with OFAC officials to negotiate a winding down of Clearstream's business with Iranian customers, it transferred the Iranian security entitlements from the CBI's account with Clearstream to a new account at Clearstream held by a different European bank. The CBI's securities continued to be held in the US bank as part of Clearstream's omnibus account. In other words, Clearstream was still holding the security entitlements in its US omnibus account and the CBI was still the beneficial owner of these security entitlements. However, the record of ownership on Clearstream's books now showed that the securities were owned by the European bank, rather than the CBI. The settlement agreement also suggests that Clearstream had reason to know that the CBI's interest in the securities had not changed. Even though Clearstream cooperated with OFAC's investigation and enacted remedial measures to strengthen customer due diligence, it still paid a hefty sum to settle these charges with OFAC.
OFAC's settlement with Clearstream extends to the securities industry a string of multimillion-dollar enforcement actions involving use of the US financial system. The government prosecuted enforcement cases against non-US financial institutions such as Credit Suisse, Barclays, ING and Standard Chartered for allegedly processing wires involving sanctioned parties through the US financial system by 'stripping' the references to the sanctioned parties from the Society for Worldwide Interbank Financial Telecommunication messages. The government is now expanding its enforcement to the securities industry, where omnibus and custodial accounts can obscure ultimate beneficial ownership.
The lesson is clear that foreign financial institutions must enact and enforce compliance programmes adequate to ensure compliance with US economic sanctions. The settlement agreement lists several remedial measures that Clearstream adopted to strengthen its sanctions compliance programme, including:
- conducting enhanced customer due diligence to understand the beneficial ownership of securities in its system (eg, requiring information about customers' relationships with any sanctioned persons or countries);
- limiting which customers are eligible to hold omnibus accounts based on their risk profile; and
- requiring customers to certify that they will not use or permit the indirect use of their accounts to facilitate the violation of US sanctions laws.
Only by scrutinising omnibus and custody accounts can companies operating in the securities industry ensure that they are not holding accounts for and providing services to sanctioned parties.
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